5 Stock Sectors To Avoid In A Recession

by Guest Blogger on January 28, 2009

We’re in the midst of a recession, so which stock sectors should we avoid at this time?

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stock sectors to avoid in a recession, keep out, danger
Image by Tim Snell

Turn on the business channels, read the business newspapers and the financial websites. On all of them you will find stock picks, one after another. The hottest buys, the plays for tomorrow and the long term positions sure to be the next Google. These reports are valuable but in a volatile stock market with a swinging VIX hovering around $50 and market swings of 3%, what may be even more valuable is to know what NOT to buy. Here are 5 to avoid.

Stock Sectors To Avoid In A Recession

1. The Banking Sector

Most people believe that the banks are responsible for the current state of the market with their reckless lending that overinflated the housing market. Regardless of the validity of that statement, the market has turned their backs on the banks and as a result, banking stocks are not only depressed in value, but many are heading towards zero. While some investors may see these valuations as attractive, ask shareholders of AIG and Lehman about attractive valuations, and you’ll see why you may want to wait for a housing bottom or other positive catalyst before buying. Morgan Stanley, Goldman Sachs, and JP Morgan will be great buys down the road and you’ll still be able to make big money; but for now, I’d keep out of these positions.

2. Auto Stocks

Investors are well aware of the auto industry woes as of late but that’s not the only reason to put the brakes on auto sector buying. This is one of the most interconnected sectors out there. The big three have largely moved together, as have all of their suppliers. By investing in these stocks you not only have to trade around news impacting your position, but you’ll also need to watch out for news affecting other positions in the sector. If GM files for bankruptcy, your Ford and Advance Auto Parts positions may just go into free fall. I’ve talked with a lot of young investors who are anticipating big gains from GM and Ford. If you ask me, there are lots of other equities out there that won’t keep you up at night.

3. Green Positions

I just wrote an article about where to put your money if you’re looking to buy green stocks. If you’re into long term investing, do check out the positions I’ve recommended in that article; but if you’re looking for a short term trade, I’m giving green a red light, unfortunately. Obama is going to bring green back, but not the way $147 oil did. We’ll revisit this sector later when Obama’s infrastructure plans take hold, but not right now. These are depressed stocks. So recycle your money into another sector for the time being.

4. Consumer Discretionary

How do you invest in down markets? The first rule of conservative investing during a recession is to stay away from consumer discretionary. If it’s a stock from the luxury sector, stay away. You may love your Coach handbag but when consumers are worried about money, that new ring from Tiffany will be put on the back burner. Consumer staples are where you want to be. Regardless of the economy, we all have to eat and we all need our medications.

5. Any stock without a dividend

I admit that this may be overly conservative but if you don’t have a healthy fear of this market, you’re going to lose money. There are a lot of high quality stocks out there with healthy dividends. Get paid to hold your stocks. You’ll be glad you did when that dividend pays out. Safe dividends are what I want and look for.

In Conclusion

Live to fight another day. Make your big speculations when the market is moving on fundamentals. In some ways, the market feels more like the lottery right now. Though, I want to be able to research stocks and make investments based on my research, I feel a bit indecisive about making certain moves. After all, look at the environment we’re in at the moment: when the stock market slides and stocks take a dive despite the fact that companies’ quarterly earnings beat the Street’s estimates, then we’re not in a market where I’d like to be a speculator.

If you’re like me and would rather sleep easier, stay away from the aforementioned sectors until you see sustainable signs of life in the market. Once you do, buy up and make money. Probably a lot of money!

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{ 1 comment… read it below or add one }

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